In discussions about energy transitions certainly under way, competition receives too little mention. Attention understandably focuses on the erosion of demand for gasoline and diesel as sales of electric vehicles (EVs) grow. But competition works in more than one direction.
Most obviously, the abilities to develop oil in low-quality, high-volume reservoirs and in deep water make liquid hydrocarbons newly and lavishly abundant. For as long as supply remains promptly responsive to price elevation and oil flows freely in trade, the price of crude will have a cap. The price of electricity will not. With requirements for transportation augmenting load destined to grow in other uses, and with governments continuing to push generation from expensive sources, the retail costs of power will rise. Even after recent improvements in the efficiencies of power generation from renewable energy and of vehicle batteries, oil’s competitive advantage hasn’t weakened. Electricity in transport still needs political help, to which economic pain represents an insidious threat.
Other competition
Competition will shape events in other ways. Although improvement in the outlook for EVs evokes speculation about peaking oil demand, mainline forecasts don’t see it. The vehicle fleet will use a lot of gasoline and diesel for many years and will not soon shrink. Forecasts of rapid extinction of the internal combustion engine and inflecting oil demand need motorists to rapidly abandon vehicle ownership in favor of ride-sharing in electric-powered fleet vehicles lacking drivers and staying cheap. Consumers and markets might not oblige.
According to most projections, growth in oil demand will decelerate but not cease despite EV penetration of new-vehicle sales. Demand for natural gas and renewable energy will increase faster. Although oil use for light-vehicle transport might indeed peak over the next quarter century, demand in other categories will more than compensate. Oil for steadily expanding air transport, for example, remains immune to competition from fuels other than, possibly, paltry amounts of subsidized biofuel. Most of the expected offset comes from expanded use of crude in petrochemical manufacture. Manifesting this expectation is the plan by Saudi Aramco and Sabic for a 400,000-b/d refinery to convert crude directly into chemicals.
While the oil market adjusts internally, the gas market begins a new phase of globalization. Until recently, gas moved between countries mainly through pipelines and under long-term LNG contracts specifying destinations and linking prices to crude oil. Those rigidities are being dismantled.
The mere start of US exports of LNG in 2016 was enough to shatter gas-oil price linkage in Europe and to jostle contracts in Asia and the Pacific. Because they calibrate price to Henry Hub gas and lack destination constraint, US LNG contracts bring new flexibility to trade. And more US LNG soon will enter the market. From less than 4 bcfd this year, US capacity to export LNG will grow to nearly 10 bcfd in 2019 from projects now being built. It’s set to increase rapidly after that from projects approved but not yet under construction. Other LNG export projects are planned outside the US. As overall gas trade expands, pipeline domination thus will subside. According to Cedigaz, interregional gas flows will increase by 88% during 2015-35. At the end of that period, trade shares will be 55% LNG and 45% pipelines—the reverse of current positions. The new destination and pricing flexibility will make gas increasingly competitive not just within regions but among them. Location price differences already are shrinking.
More NGL
And that’s only methane. Growth in global production of natural gas will raise output of NGLs, some of which will compete with refinery naphtha and crude oil in petrochemical manufacture. Some will be charged to condensate splitters, increasing naphtha supply. And some will be blended with crude, raising light-product yields. Coupled with the cap on crude prices, these developments will tend to keep gasoline cheap. And cheap gasoline will compete with—guess what!—increasingly expensive electricity in light-vehicle transport.
Ignoring competition is never wise.
